Insurance

Treat customers fairly, and loyalty will follow

March 2007

Historically payment protection insurance competition has been limited but recent events and high-profile fines will encourage new entrants into a marketplace where customers benefit from a new style of regulated sales process, education and support.

Many consumers are failed by both MPPI and PPI, which gives them a poor deal and often less protection than they think. Some may dispute this but the reality is that championing the customer in the right way will deliver sustainable loyalty and profitable value.

New regulation, competition and compliance procedures continually affect our business. This is especially true with the treatment of our customers, and the whole concept of “treating customers fairly” has never been in dispute. We simply have to work much harder to ensure our individual and collective vested interests are aligned to those of our customers and their increasing financial requirements; if we don’t then we have failed them.

Product design

The consumer’s insurance needs are more sophisticated than they were when PPI made its first appearance in the UK back in the 1970s, yet how many changes have we seen to product design over that period? Yes, of course there have been a few. but there has certainly not been anything significant.

On the positive side, MPPI has had a more uniform structure since the introduction of the Council of Mortgage Lenders’ Sustainable Home Ownership baseline product specification. However, this has not brought about any true innovation; rather it was designed to protect the consumer by setting out minimum standards.

To bring about real change there are, to me, three truths we need to recognise and accept, which determine why we need to change the way in which we approach MPPI/PPI. These truths stem from one simple yet fundamental question:

How many people involved in the manufacture, procurement and marketing of MPPI, or indeed PPI, have taken out this type of insurance themselves?

I suspect very few. Yet if we stopped to think of the reasons for this, we would probably have all the information we need to re-engineer these products and the way they are sold.

These products are, in the main, just too expensive. Revenue cannot remain the principal driver for setting up these schemes. Perhaps the looming threat of commission disclosure will go some way to addressing this.

One size no longer fits all. Employment terms now differ significantly from job to job and person to person. In addition, consumers’ needs will change, whether through changing job, moving house or some other lifestyle event. Little or no product design has been done to bring MPPI up to date.

Consumers must have all the information they need to make an informed decision. This requires a shift in the way MPPI is positioned, specifically, ‘customer before revenue’.

Time for change

Today’s consumer risk is all about lifestyle because many consumers also carry significant other borrowing. In addition, consumers are having to come to terms with an increasing erosion of their disposable income.

So it makes sense to offer products that protect not only your lending assets but also consumers’ other monthly outgoings. However, to make this work the current style of product needs to be reworked. The consumer should be able to:

• Select the type of benefits needed – so unbundle the product and allow choice.
• Select waiting periods for each element of cover according to how they, not you, perceive the risk.
• Determine for themselves the level of benefit they need for, say, unemployment and sickness. The income requirements for each may differ.
• Protect themselves against a possible income shortfall when taking a new job following a period of unemployment.

Give the consumer choices and let them make their own ‘demands and needs’ clear. Then price it fairly and according to the individual risk posed.

The future

Generally, the lack of appetite to change what has been an easily acquired and lucrative income stream has now come home to roost.

Why? Because this has resulted in a lack of systems investment by many of the insurers, which means that offering flexible consumer solutions is either not or only partly possible.

Those that have made that investment will be tomorrow’s winners because they have been ready for change, and the ability to move on from the MPPI (and PPI) legacy of ‘no change’ will determine the shape of this market for the foreseeable future.

The future is financial education for customers and increased competition, which means a balance has to be struck between the financial benefits realised by lenders and ensuring consumers are offered real value-added products to protect their financial stability.

Fortunately there are product providers, professional distributors and specialist insurance and risk management organisations who exist with the expertise and experience to deliver practical solutions for the future. By working together we will realise the benefits for all concerned. Let us be the customer’s champions!

Mike Elliott is in the Willis Mortgage Finance Team